In Depth: Telephone equipment dealers in the metro area
From the June 22, 2001 print edition
Digging out a troubled industry
Slumping telecoms see hope at the end of the line
Martin Kady II Staff Reporter
The doomsayers have descended upon the telecommunications industry, predicting a na-tional economic fallout that rivals the savings and loan bailout or the junk bond crash of the 1980s. But the optimists are holding their own, predicting a stronger industry after a wave of painful consolidation and bankruptcy.
Therein lies the complexity of the local and the global telecom industry -- if you ask four experts you'll get five opinions.
Everyone has heard about the layoffs, the cash losses and some of the bankruptcies among telecom startups. And the biggest critics of the industry are predicting a telecom Titanic.
The culprit in this case -- the proverbial iceberg -- lies underground.
Over the past five years, millions of miles of fiber-optic pipes were buried in trenches around the country to meet what was believed to be "insatiable" demand for bandwidth.
It turns out, however, all of that buildout was a massive speculative venture. Those huge fiber networks are largely dark. By one estimate, as much as 97 percent of the U.S. fiber-optic capacity goes unused.
"A lot of the fiber hasn't been lit [activated] because the companies ran out of money," says Jennifer Jones, a regional vice president for AT&T in Washington. "It was a `build it and they will come' mentality. But they misinterpreted the trends."
But that's not the entire story.
The flip side of the telecom shakeout can be found in the urban networks of fiber, where there is still a shortage of capacity and not enough companies are hooking fiber-optic lines to buildings. This is commonly referred to as "the last mile." That mile is the final connection to customers, and it has been the biggest obstacle to broadband -- high-speed transmission technology -- in the home and office.
"There's so much written about this fiber glut, but it's a glut in the long-haul networks," says Bob Bicksler, CEO of Global Metro Networks (http://www.globalmetronetworks.com), a Silver Spring company building urban fiber networks. "We have a tremendous shortage in the short-haul networks. It's a fascinating dilemma."
Old gluts and gloom
Despite some cause for optimism, many analysts believe there is more pain ahead for the telecom industry.
Industry critics cite several factors that lead them to believe an impending doom lies on the horizon:
Debt. The U.S. telecom industry has built up $650 billion in debt in constructing global networks that have not produced revenue necessary to offset the debt. In the D.C. area, PSINet and Teligent virtually collapsed under their own debt payments before filing for bankruptcy. By comparison, the S&L industry needed a $150 billion government bailout.
Overcapacity. If you look at a chart that shows bandwidth supply versus bandwidth demand, it's clear demand is a slow riser and supply has skyrocketed out of whack.
In 1998, the long-distance carriers built 1.5 million miles of fiber lines. In 2000, they built 5.6 million fiber miles. Although data traffic has increased 100 percent a year since the late 1990s, capacity has increased 400 percent.
"There are a lot of players ... and capital was easy," says Bicksler of Global Metro. "There is now enough capacity for the foreseeable future in the long-haul networks."
Equipment sales. Companies that fueled the growth with sales of switches, servers and other components are hurting as telecom buildout slows.
Picture the Internet industry as a food chain. The telecom carriers that own the electronic highways are at the top of the food chain.
If they slow the buildout, they'll need less equipment from fiber-optic component companies such as Lucent Technologies, Ciena, Corvis and Nortel Networks. Those companies, in turn, will buy less from their vendors, which are often the software makers. On the Web, the dot-coms are buying fewer Cisco Systems routers and fewer Sun Microsystems servers. All this adds up to a trickle-down affect that is well under way and probably hasn't bottomed out.
Light at the end of the ditch
Amid all this doom and gloom, however, there is another side to the telecom disaster. The glut in fiber-optic capacity is mostly concentrated in the long-haul networks -- the unused lines that lie deep in the ocean or stretch across undeveloped prairie land.
In the short-haul fiber-optic business, however, the story is just the opposite. In congested urban areas, offices can't get the fiber into the buildings fast enough.
This is why companies such as Global Metro Networks are acting bullish. Global Metro left the expensive long-distance network buildout to the giants such as Qwest Communications, Level 3 Communications and Global Crossing.
Global Metro, which has raised $240 million in venture capital, is concentrating on building metro-area fiber loops. The main competitor for Global Metro is Metromedia Fiber Network, the best known and largest player in the short-haul business.
"Customers are coming to us demanding services," Bicksler says. "We're champing at the bit."
Bicksler says he gets frustrated with all the talk of troubles in the telecom and fiber-optic industry because such analysis oversimplifies the problem. He sees the problem as one limited to the long-haul carriers who raced to a massive speculative buildout during the Internet boom.
The construction of short-haul networks, on the other hand, has lagged behind.
Universal residential broadband is many years away, and urban areas are still being built out. The downside for companies such as Global Metro Networks is it takes two to three years to build a complete fiber network for a city the size of Washington.
Trying to own the future
One company that's in a unique position is Reston-based XO Communications (http://www.xo.com). It appears to be one of the survivors in the telecom shakeout because it is an upstart competitor that has used the successful model of old-line telecoms.
While many newcomers to the industry built their telecom business on leasing phone lines from Verizon Communications and other Bell companies, XO has constructed what is called a "facilities based" system. In other words, XO owns the wires and the airwaves.
XO also has four different methods of getting to customers -- fiber optics, satellites, fixed wireless and wireless signals.
"In the long run, you need to have your own network to reach the end user," says Dom Vietri, an area vice president for XO Communications. "To just say there's a lot of fiber in the ground doesn't tell the whole story. There is a lot of fiber, but it doesn't reach the end user. It doesn't reach the last mile, and that's the issue."
XO Communications sits at the nexus of the key issues in this debate over telecom's future. On the down side, it has a huge debt load -- about $4.95 billion spent installing its network. On the up side, if it survives it'll have the infrastructure of a Verizon or AT&T.
"We're trying to build another Verizon, and that ain't cheap," Vietri says. "You can't do this in less than 10 years without some debt. Anyone who thinks they can do that is a fool. In the long run, the strength will be in the assets we own."
E-mail: mkady@bizjournals.com Phone: 703-312-8345
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